Free trade makes the nation and its citizens more prosperous. Free trade enables us to buy better goods at lower costs. Scarce capital is invested in higher value-added goods. Free trade encourages investment in cutting-edge goods. Free trade stimulates national productivity, the true measure of the prosperity of the country. The United States is better off economically and politically if it devotes resources and investment to advanced semiconductors and not to manufacturing washing machines, for example. Such is the law of comparative advantage.
History also teaches an important lesson.
In 1930, Congress passed and President Herbert Hoover signed the Smoot-Hawley Tariff Act. The legislation raised tariffs by 40-60% on a wide range of imported products. Many countries responded with reciprocal tariffs. A global trade war ensued. International trade decreased by over 60%. Economists uniformly say that the Smoot-Hawley Tariff Act exacerbated the Great Depression.
BRIDGEWATER, KKR, AND BLACKROCK’S SUPPORT FOR COMMUNIST CHINA IS DEEPLY UNPATRIOTIC
Today, however, populist politicians from former President Donald Trump to President Joe Biden use protectionism as a fig leaf for narrow partisan interests. In order to win over voters working in industries exposed to international competition, Trump imposed tariffs on close allies such as Canada. Trump said the tariffs would help domestic workers and promote national security.
The reality of the tariffs was quite different. Trump’s tariffs created several thousand jobs in the steel industry and perhaps saved 1,800 jobs for workers making washing machines. But at what cost? The average household paid up to a thousand dollars or more because of Trump’s tariffs. The jobs created or saved came at great expense: $817,000 for every job saved in the washing machine industry and $900,000 for every job created in the steel sector.
The Biden administration is continuing Trump’s tariffs on China. That is good policy. China does not practice free trade. China is an enemy of the U.S. National security trumps free trade. But with the green energy provisions of the Inflation Reduction Act, the Biden administration is as protectionist as the Trump administration. The “Buy America” provisions of the Inflation Reduction Act put at risk the framework of free trade, which has promoted prosperity and security. The tariffs risk a worldwide trade war.
The transformation of the economy from one based on hydrocarbons to one powered by green energy is not a matter of national security. Climate change is global, not national. It is in the interest of all nations to reduce greenhouse gases. “Buy American” provisions are overtly protectionist. “Buy America” encourages retaliation by other countries.
The European Union is implementing carbon border tariffs against the import of goods from the U.S. that are produced with inputs of hydrocarbons. The stated purpose of the tariffs is to encourage the U.S. and other countries to lower greenhouse gas emissions. An unstated purpose is blatant protectionism.
Of course, there are exceptions. Supremacy in military technology is, today, based heavily on semiconductors. Semiconductor supremacy is critical to the national security of the U.S. The Biden administration is thus right to impose trade barriers against imports of high-technology goods from China and to impose export restrictions on selling U.S. high technology to China. But the administration is wrong on Buy America.
Are we on the verge of repeating the mistakes that exacerbated the Great Depression of the 1930s?
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
